Banks continue to profit handsomely from their MasterCard and Visa operations, which generated an estimated 3.3% aggregate return on assets in 1993, according to an investment banker's informal survey.
While credit card returns are down from their peaks in recent years, they are still running at double the 1% to 1.5% pretax returns on other types of assets, said Robert K. Hammer, chairman and chief executive officer of R.K. Hammer Investment Bankers, Newbury Park, Calif.
He has been estimating card profitability for 10 years, each year conducting interviews with credit card executives, rating agencies, and investment bankers to determine yields.
Mr. Hammer's survey is meant to be representative of all card programs, breaking out five profit/loss categories -- total income, operating expense, chargeoffs, cost of funds, and pretax net income.
Mr. Hammer measures return on average outstandings for national brands, private-label cards, regular cards, and gold cards.
Total income for national brands dipped 80 basis points in 1993, from 19.4% to 18.6% of outstandings, primarily reflecting greater numbers of people paying off balances, a smaller number of revolvers, and those who pay a greter rate than forecast, Mr. Hammer said.
At the same time, operating expenses fell 20 basis points to 4.7% as credit card companies continued to improve productivity, he said.
Net chargeoffs continued a slow, steady decline by 30 basis points to 4.6%, as issuers invested in systems and behavior scoring and applicants in the collections department, he said.
A look at blended cost of funds shows a 50-basis-point drop to 6%, as issuers maintain a mix of maturities companies have with a variety of interest rates.
The net yield was up 20 basis points, from 3.1% in 1992.
Mr. Hammer predicts that issuers will move to eliminating grace periods to improve their profit yield. "People are getting a free ride," he said, adding, "No business can give away money."
ROAs vary widely based on what companies are doing, Mr. Hammer said, depending on credit quality, credit and collection practices, maturity of portfolios, source of accounts, and the percentage of cardholders who revolve.
The ranges include 15% to 21% for total income; 3% to 6% for operating expense, 1% to 7% for chargeoffs, 4% to 7% for cost of funds, and 1% to 6% for pretax net income.
Mr. Hammer found that private-label programs have a pretax net income yield of 0.5%, well below the 3.3% of national Visa and MasterCard programs.
Retail store cards generally have a higher interest rate than national brands, but higher delinquency rates, chargeoffs, and operating expense.
The net yield for regular cards was 3.2% and for gold cards 3.5%.